THE COST OF AIR POLLUTION - HEALTH IMPACTS OF ROAD TRANSPORT

THE COST OF AIR POLLUTION - HEALTH IMPACTS OF ROAD TRANSPORT

THE COST OF AIR POLLUTION - HEALTH IMPACTS OF ROAD TRANSPORT

The Cost of Air Pollution Health Impacts of Road Transport

The Cost of Air Pollution HEALTH IMPACTS OF ROAD TRANSPORT

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Please cite this publication as: OECD (2014), The Cost of Air Pollution: Health Impacts of Road Transport, OECD Publishing. http://dx.doi.org/10.1787/9789264210448-en

FOREWORD THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 3 Foreword Local air pollution, and the health problems it causes, have received increased attention in many parts of the world, often because of specific incidents in major cities. However, over the last few years, the evidence-base has improved significantly, and now demonstrates that the health impacts of local air pollution, particularly from road transport, are much larger than previously thought.

Drawing on this improved evidence-base this study estimates the economic cost of the health impacts of air pollution from road transport – on a global scale, but with special reference to People’s Republic of China, India and the OECD member countries.

After the preparation of this book was finished, the World Health Organization published new information showing that 3.7 million people died globally because of outdoor air pollution in 2012; a further increase from the 3.4 million mortalities in 2010 that this book is based on. The book was prepared by Dr Rana Roy, who in turn wishes to acknowledge the able research assistance provided by Mr Stuart Baird. Jenny Calder of the OECD Secretariat contributed to the preparation of the final manuscript, and Nils Axel Braathen of the OECD Secretariat oversaw the implementation of the project.

TABLE OF CONTENTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 5 Table of contents List of abbreviations ___ 9
Executive summary ___ 11
Chapter 1.

Defining the economic cost of health impacts ___ 15
1.1. Mortality: The value of statistical life ___ 17
1.2. Morbidity: In search of a standard method ___ 19
1.3. The dominance of mortality costs over morbidity costs ___ 23
Notes ___ 26
References ___ 27
Chapter 2. Reviewing the evidence on and calculating the cost of the health impacts of air pollution ___ 29
2.1. Improved reporting versus real changes in impacts and costs ___ 30
2.2. Air pollution from road transport ___ 37
2.3. Health impacts of air pollution ___ 42
2.4. Economic cost of the health impacts of air pollution ___ 53
2.5.

Road transport’s share of the above economic cost ___ 62
Notes ___ 65
References ___ 67
Chapter 3. Rethinking appraisals to mitigate the health impacts of air pollution from road transport ___ 73
References ___ 78
Tables 1.1. CAFÉ Programme cost-benefit analysis (CBA), with and without WTP values ___ 24
1.2. TSAP cost-benefit analysis (CBA), with mortality in VOLYs and VSLs 25 2.1. Selected risk factors ranked by attributable burden of disease in 1990 and 2010 ___ 33
2.2. Selected risk factors ranked by attributable burden of disease in selected regions in 2010 ___ 34
2.3.

Deaths, YLLs and DALYs from ambient air pollution in 2005 and 2010 ___ 44
2.4. Deaths from ambient air pollution in OECD countries . 46

TABLE OF CONTENTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 6 2.5. Years of life lost (YLL) from ambient air pollution in OECD countries in 2005 and 2010 ___ 47
2.6. Disability-adjusted life years lost (DALYs) from ambient air pollution in OECD countries in 2005 and 2010 ___ 48
2.7. Deaths from ambient air pollution in China in 2005 and 2010 ___ 49
2.8. YLLs from ambient air pollution in China in 2005 and 2010 ___ 49
2.9. DALYs from ambient air pollution in China in 2005 and 2010 ___ 50
2.10. Deaths from ambient air pollution in India in 2005 and 2010 ___ 50
2.11.

YLLs from ambient air pollution in India in 2005 and 2010 ___ 51
2.12. DALYs from ambient air pollution in India in 2005 and 2010 ___ 51
2.13. Economic cost of deaths from ambient air pollution in OECD countries in 2005 and 2010 ___ 58
2.14. Indicative estimate of the economic cost of health impacts from ambient air pollution including morbidities in OECD countries in 2005 and 2010 ___ 59
2.15. Economic cost of deaths from ambient air pollution in China in 2005 and 2010 ___ 60
2.16. Indicative estimate of the economic cost of health impacts from ambient air pollution including morbidities in China in 2005 and 2010 ___ 60
2.17.

Economic cost of deaths from ambient air pollution in India in 2005 and 2010 ___ 61
2.18. Indicative estimate of the economic cost of health impacts from ambient air pollution including morbidities in India in 2005 and 2010 ___ 62
2.19. Indicative estimate of road transport’s share of the economic cost of deaths from ambient air pollution in EU24 in 2010 ___ 64
2.20. Indicative estimate of road transport’s share of the economic cost of health impacts from ambient air pollution including morbidities in EU24 in 2010 ___ 64
2.21. Indicative estimate of road transport’s share of the economic cost of deaths from ambient air pollution in OECD countries in 2010.

64
2.22. Indicative estimate of road transport’s share of the economic cost of health impacts from ambient air pollution including morbidities in OECD countries in 2010 ___ 65
3.1. TSAP CBA; costs, benefits and B/C ratios ___ 75
3.2. Car, bus and rail revenues in relation to marginal social costs in Great Britain ___ 77
Figures 2.1. Estimates of deaths from ambient particulate matter (PM) pollution 32 2.2. The economic cost of the health impacts of air pollution from road transport: Three links in the chain . 35

TABLE OF CONTENTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 7 2.3. The economic cost of the health impacts of air pollution from road transport: Three bases of evidence ___ 35
2.4. Deaths from ambient air pollution ___ 44
2.5. Deaths from ambient air pollution in OECD countries, China and India, per million capita, in 2005 and 2010 ___ 52
3.1. TSAP CBA; costs and benefits ___ 75
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The Cost of Air Pollution Health Impacts of Road Transport © OECD 2014 9 List of abbreviations AQG Air Quality Guidelines B/C Benefit-cost ratio CAFÉ Clean Air for Europe Programme CBA Cost-benefit analysis COI Cost-of-illness CPI Consumer price index CSE Centre for Science and Environment DALY Disability-adjusted life years lost DfT UK Department for Transport DKK Danish krona EEA European Environment Agency ESCAPE European Study of Cohorts for Air Pollution Effects EU European Union EUR Euro EVs Electric vehicles GBD Global Burden of Disease GDP Gross domestic product HEAT Health economic assessment tool HEI Health Effects Institute IARC International Agency for Research on Cancer IIASA International Institute for Applied Systems Analysis LYL Life years lost MIT Massachusetts Institute of Technology MTFR Maximum technical feasible reduction NOx Nitrogen oxides NPV Net present value PM Particulate matter PPP Purchasing power parity PVb Present value of benefits PVc Present value of costs QALY Quality-adjusted life years lost TSAP Thematic Strategy on Air Pollution UK United Kingdom USD United States dollar

LIST OF ABBREVIATIONS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 10 US EPA United States Environmental Protection Agency VOLY Value of a life year lost VSL Value of a statistical life VSLY Value of a statistical life year WHO World Health Organization WTP Willingness to pay YLL Years of life lost

The Cost of Air Pollution Health Impacts of Road Transport © OECD 2014 11 Executive summary Outdoor air pollution kills more than three million people across the world every year, and causes health problems from asthma to heart disease for many more.

This is costing OECD societies plus People’s Republic of China and India an estimated USD 3.5 trillion dollars a year in terms of the value of lives lost and ill health, and the trend is rising. But how much of the cost of those deaths and health problems is due to pollution from cars, trucks and motorcycles on our roads? Initial evidence suggests that in OECD countries, road transport is likely responsible for about half the USD 1.7 trillion total. Air pollution in OECD countries has fallen in recent years, helped by tighter emission controls on vehicles, but has increased in China and India as rapid growth in traffic has outpaced the adoption of tighter emission limits.

The switch to more polluting diesel vehicles in many countries in part to combat climate change has also added to pollution effects, threatening to arrest the downward trend in emissions from road transport in OECD countries. Over the five-year period from 2005 to 2010, there was an overall increase of about 4% in the number of premature deaths globally caused by outdoor air pollution – with an improvement in the OECD world being offset by a larger deterioration in the rest of the world.

These figures, based on new technologies for measuring pollution and improved analysis of health data, are far higher than those from previous studies of premature death and illness from air pollution. Calculating the economic cost of these health impacts, and how much is due to air pollution from road transport, requires estimating the value of lost lives or lost quality of life in the case of illness. There is a standard method for calculating the cost of lost life, but not for loss of health. Hence this study adds to the mortality cost a 10% margin for loss of health (morbidity), based on the best available evidence in recent studies.

It is now possible to give a better calculation of the health impacts of air pollution and of the associated economic cost. Available evidence and methodology suggest that about 50% of that cost in OECD countries is specifically attributable to road transport, although more work needs to be done to provide a robust calculation for the road transport share.

  • EXECUTIVE SUMMARY THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 12 Main findings
  • The number of deaths due to outdoor air pollution fell by about 4% in OECD countries between 2005 and 2010, while the number of years of life lost fell even further. But while 20 of the 34 OECD countries achieved progress, 14 did not.
  • The number of deaths due to outdoor air pollution in China rose by about 5%, although years of life lost increased by only about 0.5%. China has arguably succeeded in slowing the increase in the effect of air pollution on health, since a reduction in exposure to pollution will have a greater effect on years of life lost than on the number of deaths.
  • India registered an increase of about 12% in the number of deaths and about 3% in years of life lost. Although the number of deaths in India is only just over half the number in China, the trend in India is increasing faster.
  • The cost of the health impact of outdoor air pollution in OECD countries, both deaths and illness, was about USD 1.7 trillion in 2010. Available evidence suggests that road transport accounts for about 50% of this cost, or close to USD 1 trillion.
  • The best available estimate of the economic cost of the health impacts of outdoor air pollution in China and India combined is larger than the OECD total – about USD 1.4 trillion in China and about USD 0.5 trillion in India in 2010. There is insufficient evidence to estimate the share of road transport in these figures but even if it is less than half, it nonetheless represents a large burden.
  • Main recommendations
  • A defensible calculation of the economic cost of health impacts must be based on economic first principles. This means continuing the use of the standard method for calculating the cost of mortality – the Value of Statistical Life (VSL) as derived from individuals’ valuation of their willingness to pay to reduce the risk of dying.
  • Indicative estimates suggest that morbidity would add 10% to the mortality cost figures, but work is needed to complete a standard method of calculating morbidity costs in a manner consistent with the standard method for calculating mortality costs.

A defensible calculation of the economic cost of the health impacts of air pollution must base itself on the new body of epidemiological evidence made possible by recent innovations in monitoring and modelling technology.

  • EXECUTIVE SUMMARY THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 13
  • A defensible calculation of the economic cost of the health impacts of air pollution from road transport must base itself on sector-specific evidence consistent with the new body of epidemiological evidence. This necessitates a renewal of the sector-specific evidence base. In the meanwhile, it is possible to provide indicative estimates only of road transport’s share in the overall cost.
  • Governments should maintain strong regulatory regimes, particularly strict vehicle standards. Given the size of the economic cost of the health effects of air pollution, the benefits of reducing that burden could easily outweigh the monetary cost of investments in more ambitious programmes to reduce pollution.

Governments should also rethink their approach to appraising policy moves, such as the regulatory and tax settings that facilitated the shift to diesel vehicles. Importantly, there is also a need to ask how it is that the appraisal process has hitherto failed to secure the passage of a range of policy proposals for example in relation to public transport that could have reduced air pollution – and how to rectify this in future.

The Cost of Air Pollution Health Impacts of Road Transport © OECD 2014 15 Chapter 1 Defining the economic cost of health impacts This chapter begins with a restatement of the economic first principles informing the “valuation” of life and health and, therewith, the “cost” of mortalities and morbidities.

It shows that a standard method is available by which to measure the cost of mortality – the “value of statistical life” (VSL). While there is work to be done in order to establish standard measurement methods regarding morbidity, it is possible to proceed with an indicative estimate of the additional cost imposed by morbidities drawn from the best available evidence.

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 16 This study reports on the economic cost of the health impacts of air pollution from road transport – on a global scale but with special reference to People’s Republic of China (hereafter “China”), India and the OECD world. Any report on the “economic cost” of impacts on human health, be it from air pollution or any other source, involving as it does a “valuation” of life and of health, needs to explain as clearly as possible what precisely is meant by the terms “value” and “cost”.

This is a non-trivial task. For the use of these terms is frequently misunderstood.

The world is not yet free of the illusion that the wealth of the world subsists in gold (or some other form of money): the “chrysohedonistic illusion”. Even though an explicit rejection of this view characterises the founding works of economic science in the mid-eighteenth century following through to today,1 long after gold has given way to paper money, it is all too frequently supposed that what economists really mean by “value”, or by “cost”, is a given sum of money.

It is therefore as well to begin by stating that this is not so: money is not the thing being measured but the instrument with which we measure it. Of course, money plays several roles wherever it is present; and rival schools of economic thought hold rival views on the roles that it plays. In the context of the present analysis, however, and irrespective of these otherwise rival views, all economists can agree that money serves here merely as a common unit of account, an imperfect instrument with which to measure certain nonmonetary phenomena: namely, the several various items that all of us as individuals “value” in the ordinary sense of the word.2 So, what is it that we as individuals value and that economists as observers seek to measure? They include:
  • consumption – and, with it, the sacrifice of some items of consumption in order to secure others, including the sacrifice of current consumption in the act of investment in order to secure greater future consumption
  • leisure – and the sacrifice of some leisure in the act of labour in order to secure consumption
  • health – and the sacrifice of some part of consumption in order to secure health
  • life – and the sacrifice of some part of consumption in order to preserve it.

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 17 “Value” as used here – also called “utility” – is simply a measure of these items that we all value in the ordinary sense of the word; and “cost” is a measure of their loss, absolutely or as a means of securing other valuable items. The task of the economist then becomes one of aggregating at a social level these millions of individual valuations at their marginal rates of substitution.

1.1. Mortality: The value of statistical life In the case of the ultimate impact on health – mortality – economics today possesses a singular, and singularly elegant, standard method by which to measure the cost of this impact from a given source: that is to say, to measure the loss of the valued item – life – at the level of society as a whole.

This is the “value of statistical life” (VSL), as derived from aggregating individuals’ willingness to pay (WTP) to secure a marginal reduction in the risk of premature death.

OECD (2012) describes the basic process of deriving a VSL value from a WTP survey: The survey finds an average WTP of USD 30 for a reduction in the annual risk of dying from air pollution from 3 in 100 000 to 2 in 100 000. This means that each individual is willing to pay USD 30 to have this 1 in 100 000 reduction in risk. In this example, for every 100 000 people, one death would be prevented with this risk reduction. Summing the individual WTP values of USD 30 over 100 000 people gives the VSL value – USD 3 million in this case. It is important to emphasise that the VSL is not the value of an identified person’s life, but rather an aggregation of individual values for small changes in risk of death (OECD, 2012).

As such, the economic cost of the impact being studied becomes the VSL value multiplied by the number of premature deaths; the economic benefit of a mitigating action becomes the same VSL value multiplied by the number of lives saved.

In addition, following an extensive research effort led by the OECD (OECD, 2012; Biausque, 2010; Braathen, 2012; Hunt and Ferguson, 2010; Hunt, 2011), including a rigorous meta-analysis of VSL studies (OECD, 2012), starting with 1 095 values from 92 published studies, both researchers and policy makers now possess a set of OECD-recommended values for average adult VSL. In units of 2005 USD, the recommended range for OECD countries is USD 1.5 million – 4.5 million, the recommended base value is USD 3 million. The remit of this study is to apply these VSL values to the problem at hand: the problem of the health impacts of air pollution from road transport.

There is, however, a need to pause to add a few words on the meaning and purpose of the standard method. For this in turn sets sharp limits to what can

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 18 and cannot be done in this report. In particular, it shows up the folly, not to say absurdity, of attempting to combine the standard method with alternative methods of calculating the “costs” of mortality that have an entirely different meaning and purpose. The reasoning informing the standard method is simple enough and may be simplified even further for the purpose of presentation as follows (Biausque, 2010; OECD, 2012). Suppose that each individual has an expected utility function, EU, relating the utility of consumption over a given period, U(y), and the risk of dying in that period, r, of the form: EU(y, r) = (1 – r) U(y).

The individual’s WTP, to maintain the same expected utility in the event of a reduction in the level of risk from r to r’ is the solution to the equation: EU(y – WTP, r’) = EU(y, r). VSL is the marginal rate of substitution between these two valued items, consumption and the reduction in the risk of dying, such that: VSL = WTP/r. For the present, the two main points to note are these. First, the value that the standard method seeks to capture is the value (in this case, the value of the reduction in the risk of dying) to the individual; it is not, for example, the value of postponed revenue to the undertaker or the value of higher pension expenditure by the government.

And second, the task of the economist is one of aggregating valuations by individuals at their marginal rates of substitution; it is not one of imposing valuations from above.

It is worth recalling here the words of Jacques Drèze, the originator of the standard method, in reflecting on its origins in an interview more than forty years later: In 1960, two French engineers were wondering how much should be spent on investments enhancing road safety. So they tried to define the economic value of a life saved. They suggested measuring that economic value by the future income of a potential victim ... and stumbled on the question: should the value of future consumption be subtracted, in order to appraise society’s net loss? I realised at once that this very question pointed to the basic flaw of the approach: people want to survive and consume, not starve! Going back to the root of the problem, I introduced what is known today as the “willingness to pay” approach to valuing lives in safety analysis.

How much would an individual be willing to pay in order to reduce his probability of accidental death? That is for the individual to decide, given his resources ... [and] the subjective importance he attaches to survival... Road safety being a public good, individual willingness to pay should then be aggregated as in the

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 19 Lindahl-Samuelson theory of public goods (Dehes, Drèze, and Licandro, 2005). It follows that alternative methods of calculating the “cost” of mortality which seek neither to capture the value to the individual nor to register and aggregate the valuations by individuals cannot substitute for the standard method; nor can they be simply combined with the standard method to produce composite estimates.

This is not to deny that these alternative methods can offer interesting policy-relevant information.

But that information needs to be treated separately from the information yielded by the standard method. To do otherwise is almost a category error. For example, an incidence of pollution that results in the premature deaths of working-age people has an impact on the national accounts through the loss of output and wages; those responsible for studying and forecasting gross domestic product (GDP) changes have an interest in measuring this impact. Clearly, however, a calculation that stops counting at retirement age and places a zero value on the death of a person of 65 years is not counting the same thing as the standard method.

It should not occasion surprise that this national-accounts’ measure of the “cost” of mortality frequently produces very different estimates to those produced by the standard method.3 Similarly, the attempt to derive “WTP values” and “VSL values” from “revealed preference” rather than “stated preference” – for example, by reference to wage levels in dangerous jobs – can reveal interesting information on the degree of bargaining power, or the lack thereof, possessed by particular segments of the workforce.4 What they do not reveal is what is registered by the standard method: the valuation by individuals of their WTP to reduce the risk of death.

As shown below, these issues of compatibility also have a bearing on the valuation of morbidity. But so far as concerns the valuation of mortality, the conclusion drawn here is simple. The standard method, safely grounded as it is in the first principles of economic science, will suffice for the task at hand; the rest can be set aside. 1.2. Morbidity: In search of a standard method Economics today does not possess a singular, let alone singularly elegant, standard method by which to measure the cost of morbidity from a given source: that is, to measure the loss of the valued item, health. Nor do researchers and policy makers possess anything like a set of OECDrecommended values for the several and various morbidities that can arise from a given source.5

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 20 In part, this lack reflects the current state of research and its limitations. As noted below, there are two lines of research in this field. There is a reasonably well-established tradition of developing a plural rather than singular method of calculating the various costs of morbidities – but this has not yet arrived at a clear consensus on exactly what needs to be calculated or the values at which they are to be calculated. There is also a more recent line of research which seeks to arrive at a composite cost estimate – but this is nowhere near a state of maturity sufficient to generate either a consensus on method or a set of agreed values across the OECD world.

This lack also reflects a material difference in the subject matter of the two fields. There is a material difference between the “cost of mortality” and the “costs of morbidity” – or rather, several material differences. For the latter item is, in reality, plural in several respects.

Whereas mortality is, in the nature of things, a singular and well-defined endpoint, morbidities entail a plurality of endpoints – indeed, a very large range of endpoints, varying greatly in the extent of severity, and complicating enormously the task of eliciting and aggregating individual WTP values. In addition, whereas the cost of mortality is, in an immediate and unconditional sense, borne by the individual who dies, a case of morbidity can entail the imposition of costs on a plurality of agents – to begin with, the individual who is suffering ill-health and the many who are involved in the organisation and execution of formal and informal care of the one who is ill.

Finally, the individual who is suffering ill-health suffers a plural loss of utility: not only the “pain and suffering” imposed by the illness but also the loss of some part of consumption (and leisure) in expending income (and time) in “averting” and “mitigating” activities in response to current and prospective morbidities. Therefore, and insofar as morbidity imposes a loss in utility on a plurality of agents as well as a plural loss of utility on the one who is ill – and without departing in the least from the distinction between economic calculation and other forms of calculation, such as national accounting that is so critical to a correct understanding of VSLs – it is entirely legitimate to calculate the costs of morbidity in a plural manner: as the sum of separate elements of cost.

In a more or less recent paper for the OECD, Hunt and Ferguson (2010) set out the elements of this sum: The economic costs of the health impacts of air pollution can then be given by the sum of three different categories: 1. Resource costs: Represented by the direct medical and non-medical costs associated with treatment for the adverse health impact of air pollution plus avertive expenditures. That is, all the expenses the individual faces with visiting a doctor, ambulance, buying medicines

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 21 and other treatments, plus any related non-medical cost, such as the cost of childcare and housekeeping due to the impossibility of the affected person in doing so; 2. Opportunity costs: Associated with the indirect costs related to loss of productivity and/or leisure time due to the health impact; 3. Disutility costs: Refer to the pain, suffering, discomfort and anxiety linked to the illness.

It should be noted that the “loss of productivity” referenced above, and regardless of exactly how it is estimated, should be read here as the loss of income and hence consumption for the affected person and the affected person’s household – as distinct from the loss of valued-added in the employer’s accounts or in the national accounts.

In this manner, each of these elements as well as their sum can be defined in conformity with the economic first principles set out in this chapter.

Unfortunately, this line of research has not yet had time to establish itself as a standard method, with a high degree of agreement on the definition of the elements to be calculated and the values at which they are to be calculated. There are several issues that need to be resolved, including but not restricted to the following (Hunt and Ferguson, 2010; and Hunt, 2011):
  • the definition of distinct endpoints – without which WTP values make little sense since the disutility of the pain and suffering involved in “illness” can range from trivially low to very high;
  • the need for consistency between methods for estimating the different cost elements;
  • the obvious need to avoid double-counting;
  • but also, and just as importantly, the need to be comprehensive – in particular, the need to include WTP values for disutility, rather than restrict the definition of costs to “resource costs” and “opportunity costs” alone, and to include both lost income and lost leisure in opportunity costs rather than restrict the definition of opportunity costs to lost income alone. Nonetheless, this is a line of research that is safely grounded in economic first principles and should in the fullness of time be able to deliver the goods: that is, a standard method to calculate the costs of morbidity. What is more unfortunate is that the search for a standard method has taken a turn in quite another direction, one which might never arrive at a destination that is capable of winning general agreement. This is the attempt to arrive pari pasu at a composite cost estimate of morbidity and mortality. The reasoning informing this approach is as follows. The epidemiological literature can and does estimate mortality not only in terms of the number of premature deaths but also in terms of the years of life lost (YLLs) or life years

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 22 lost (LYLs): that is, adjusting for the age profile and also the pre-existing condition of those impacted by mortality. The same literature can, and sometimes does, estimate morbidity not only in terms of its multiple endpoints but also in terms of “quality-adjusted life years lost” (QALYs) – or, alternatively described, “disability-adjusted life years lost” (DALYs). Given this, if economists could arrive at a “value of a life year lost” (VOLYs) (sometimes described as “value of a statistical life year” – VSLY), they could derive values for QALYs as a co-efficient of VOLYs – and therefore determine a measure of the “economic cost” of morbidity as a co-efficient of the “economic cost” of mortality.

Once this task is achieved, policy makers could be relieved of the burden of applying VSLs derived from WTP surveys as a measure of the economic cost of mortality.

Now if this approach were well-founded, then the recent meta-analysis of VSLs and related research effort by the OECD to establish recommended values – not to mention more than 50 years of progress in economic science since the pioneering work of Jacques Drèze – could well become redundant. There is, however, good reason to suppose that it is not well-founded. First, as a matter of record, it should be noted – as indeed is noted in an important early paper for the US Environmental Protection Agency (US EPA) (Hubbell, 2002) – that the original interest of policy makers in the use of QALYs was as “an alternative method that can account for morbidity effects as well as losses in life expectancy, without requiring the assignment of dollar values to calculate total benefits”.

And as the US EPA Science Advisory Board advised at the time: whilst there was merit in using QALYs and therefore VOLYs in certain contexts and for certain purposes, “alternative measures, such as the VSLY or the value of a QALY, are not consistent with the standard theory of individual WTP for mortality risk reduction” (Hunt and Ferguson, 2010; and Hunt, 2011).

Of the many ways in which the new approach can violate the letter and spirit of the standard theory, the following deserve special mention:
  • Non-monetised QALYs, however useful they are to health professionals, reflect their valuations of the morbidity suffered by others – not valuations by representative individuals in the general population – and this will necessarily flow through into their monetisation.
  • VOLYs are rarely derived from WTP surveys even today (Hunt, 2011) – even if it is in principle possible to do so – and therefore also reflect the valuations of external parties.

However they are derived, VOLYs will necessarily produce results that differ from, and are inconsistent with, the results given by VSLs: the cost of the death of a group of people of a given age will automatically be counted as less than the death of a comparable group of younger people with otherwise

  • 1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 23 identical characteristics since the number of LYL for the former group will be less than that for the latter.
  • Whether monetised or not, QALYs can involve an element of “double jeopardy” (Hubbel, 2002) as described in Hubbel (2006): “If the QALY loss is determined based on the underlying chronic condition and life expectancy without regards to the fact that the person would never have been in that state without long term exposure to elevated air pollution, then the person is placed in double-jeopardy. In other words, air pollution has placed more people in the susceptible pool, but then we penalize those people in evaluating policies by treating their subsequent deaths from acute exposure as less valuable, adding insult to injury, and potentially downplaying the importance of life expectancy losses due to air pollution.”
  • The combination of counting LYL, rather than lives lost, and carrying through pre-existing conditions means that the VOLY-QALY approach “explicitly places a lower value on reductions in mortality risk accruing to older populations with lower quality of life” (Hubbel, 2002). Now it would be dogmatic to conclude that the search for a composite method will necessarily fail to resolve these issues in a manner that is compatible with economic first principles. It is clear, however, that this search has not arrived at such a destination and cannot today offer a set of values that are in any way compatible with the OECD-recommended values for VSLs that this report is tasked to apply.

Against this background – the availability of a singular standard method for calculating mortality costs, a well-founded search for a plural method for calculating morbidity costs which is not yet complete, an also-incomplete search for a singular method which may be fatally flawed – the approach adopted in this report is to concentrate on the task at hand. As such, the study reports on both mortality and morbidity impacts of air pollution but calculates costs for mortality only, and using only the OECD-recommended values for VSLs – and then adds to this only a provisional indicative estimate of the additional cost imposed by morbidity.

It follows that if the OECD and its member-governments wish to calculate the economic costs of air pollution’s impact on morbidity on a par with the calculation of the economic costs of air pollution’s impact on mortality offered below, it is necessary to build an economically robust evidence-base on morbidity on a par with the economically robust evidence-base on mortality established in OECD (2012). 1.3. The dominance of mortality costs over morbidity costs As is indicated below and in the discussion in Chapter 2, the costs of morbidity are large. As a result, it would indeed be advisable to capture more

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 24 precisely these costs and their constituent parts in order to develop more effective interventions to reduce them. But mortality costs are, and necessarily so, much larger. In any defensible calculation of “economic costs” properly defined, mortality dominates over morbidity as a share of the total economic cost of health impacts from air pollution. The most recent OECD report to address this point sums it up as such: “overall health costs are dominated by the cost of premature mortality; the order of magnitude changes vary significantly between morbidity and mortality.” (Hunt, 2011 and the discussion following Table 2.1.) This finding has been established for a long time.

Inter alia, Hunt (2011) cites a 1996 report estimating morbidity costs at 15-45% of total costs, with mortality costs accounting for 55-85%. More recent research, with more accurate values, tends to attribute a much higher share to mortality costs. Hunt (2011) cites the 2010 study by the US EPA of the benefits of the 1990 Clean Air Act Amendments, attributing 93% of the benefits to reductions in mortality (Hunt, 2011, Table 2.6).

This last point, the progressive attribution of a larger share of the total to mortality, is best shown by concentrating on a single programme and its progress. From Hunt and Ferguson (2010), we can extract the following data on an early iteration of the Clean Air for Europe (CAFÉ) Programme, showing the effects of adding in, first, non-mortality WTP values and, next, mortality WTP values. Table 1.1. CAFÉ Programme cost-benefit analysis (CBA), with and without WTP values Benefits in reduced damage costs EUR billions, 2005 As a % of programme cost Medical cost 0.38 Lost production cost 3.06 Crop losses 0.33 Materials 0.19 Total 3.96 56 Adding in non-mortality WTP Non-mortality WTP 10.40 New total 14.36 202 Adding in mortality WTP Mortality WTP 29.09 Grand total 43.45 612 Source: Data reported in Hunt, A.

and J. Ferguson (2010), A review of recent policy-relevant findings form the environmental health literature, OECD, Paris.

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 25 If valued by the individual’s WTP, the benefits in reduced mortality account for 67% of the grand total. And WTP values account for 72% of the remainder. In short, mortality costs dominate morbidity costs; and the values for (dis)utility dominate the values for resource costs and opportunity costs. The most recent CBA for the Thematic Strategy on Air Pollution (TSAP) (Holland, 2012), which builds upon the CAFÉ Programme, estimates the baseline damage costs as follows: On the basis of the OECD-recommended approach in OECD (2012) – calculating with mean VSLs – mortality costs claim a 91% share of total costs in this European research, close to the 93% share of total benefits reported for reductions in mortality in the US EPA study.

In addition, the VSL values used in Holland (2012) pre-date the higher VSL values recommended in OECD (2012); applying the latter would yield a result above 91%. Hence, the most recent evidence suggests that morbidity costs add to the total by around 10% of the cost of mortality as given by mean VSLs. And this is the estimate carried over as a provisional indicative estimate in the calculations of Chapter 2.

The further development of the plural method of calculating morbidity costs, including a more comprehensive calculation of WTP values, may well raise morbidity’s share. But it is not credible to suppose that it would raise that share above that of mortality. If despite this weight of evidence in the specialist literature, nonspecialists are sometimes inclined to suppose that morbidity costs, and especially medical costs, are the dominant share of the economic costs of health impacts, it is only because of critical ambiguities in the use of the term “costs”.

For example, a consultants’ report for the US EPA from the turn of the century, reporting on “asthma costs” for 1997 (Chestnut, Mills and Agras, 2000), shows “direct costs” (medical expenditures in the treatment of illness) Table 1.2.

TSAP cost-benefit analysis (CBA), with mortality in VOLYs and VSLs Baseline health impacts from air pollution in year 2030 (%) All mortality – LYL – in median VOLY – as a % of the total (with median VOLY) 69 All mortality – LYL – in mean VOLY – as a % of the total (with mean VOLY) 84 All mortality – number of deaths – in median VSL – as a % of total (with median VSL) 83 All mortality – number of deaths – in mean VSL – as a % of total (with mean VSL) 91 Source: Data extracted from Holland (2012), Cost-benefit Analysis of Scenarios for Cost-Effective Emission Controls after 2020, Version 1.02, November 2012, corresponding to International Institute for Applied Systems Analysis (IIAC) Thematic Strategy on Air Pollution Report #7, EMRC.

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 26 to be greater than “indirect costs”, and “morbidity costs” to be greater than “mortality costs”. But this is only because “indirect costs” are defined here as being “the market value of lost productivity (e.g., wages)”. The authors themselves clearly warn that this is not the appropriate measure.6 But to no avail: even today, that paper is sometimes used to question this critical scientific finding of the dominance of mortality costs. And yet: how could economic science find otherwise? In the language of economics, cost is not a sum of money; cost is the loss of what we value.

We value consumption, leisure, health and life. Jacques Drèze says: “People want to survive and consume, not starve!” To this should be added: “People want to live, in health if possible, in sickness if need be. In sickness and in health, people want to live!” It is only from the contrary perspective of an ancient chrysohedonism, predating not only the 50 years’ of progress in valuation since the early work of Jacques Drèze, but also the 250 years’ of progress in the understanding of value since Francois Quesnay and Adam Smith – only from this perspective of “counting the King’s money” – that medical expenditures can loom larger than life.

Economic science provides a very different calculation.

Notes 1. To keep it manageable, the referencing in this report is restricted to items published in the twenty-first century. But the veracity of this claim – that is, the universal rejection of chrysohedonism by all major schools of economics from the mid-eighteenth century to the present day – can be checked easily enough by consulting inter alia the works of Francois Quesnay, Adam Smith, David Ricardo, Karl Marx, Leon Walras and Kenneth Arrow. 2. This is also described as “use value” as distinct from “exchange value” in the language of the classical economists and as “utility” in neo-classical and presentday economics.

3. To repeat: this is not to say that the impact on GDP is not interesting or that it should be left unreported. But it needs to be reported separately; and so do the reasons for that separation. There is a parallel here with the issue of GDP impacts of public investment projects. In recent years, in the case of certain high-profile projects, the UK Department of Transport has reported results in terms of both economic evaluation and national accounts: that is, both cost-benefit results and GDP impacts. But it has taken care to present these calculations separately and to explain the reasons for it.

See for example UK Department for Transport (UK DfT) (2006).

4. See for example the recent paper by Qin, Li and Lui (2013) on how workers’ lack of bargaining power in certain sectors, including especially agriculture, can distort the results. 5. On the current state of research on the costs of morbidity, see in particular Hunt and Ferguson (2010) and Hunt (2011).

1. DEFINING THE ECONOMIC COST OF HEALTH IMPACTS THE COST OF AIR POLLUTION: HEALTH IMPACTS OF ROAD TRANSPORT © OECD 2014 27 6. See Hunt (2011), where the authors warn as follows: “It should be noted that COI [costof-illness] estimates are a useful measure of financial burden of disease, but they do not measure the monetary value of the full effect of disease on the welfare of the population and are therefore insufficient for a full cost-benefit analysis of public policies aimed at reducing morbidity or mortality.

Willingness to pay (WTP) is the more appropriate measure of the change in welfare in cost-benefit analysis, because it reflects not just the financial effect but also the value people place on the effect on quality of life and longevity... In addition, there is substantial evidence that WTP for reductions in mortality risk far exceed the expected value of lost earnings, which is the COI measure of the financial effect of premature mortality...” References Biausque, V. (2010), The Value of Statistical Life: A Meta-Analysis, OECD, Paris, http:// search.oecd.org/officialdocuments/displaydocumentpdf/?cote=ENV/EPOC/ WPNEP(2010)9/FINAL&doclanguage=en.

Braathen, N.A. (2012), “Valuation of human lives”, Presentation at an Informal Joint Workshop of the Regulatory Policy Committee and the Annual Meeting of Sustainable Development Experts on The Role of Impact Assessments in Policy Making, OECD, Paris. Chestnut, L. G., D.M. Mills and J. Agras (2000), National Costs of Asthma for 1997, prepared for US Environmental Protection Agency, Washington, DC, http:// yosemite.epa.gov/ochp/ochpweb.nsf/content/asthmacost.htm. Dehes, P., J. Drèze and O. Licandro (2005), “From uncertainty to macroeconomics and back: An interview with Jacques Drèze”, Macroeconomic Dynamics, 9, pp.

429-461. See also CORE Reprints 1770, Centre for Operations Research and Econometrics, Louvain-la-Neuve, www.uclouvain.be/core.

DfT (Department for Transport) (2006), Transport, Wider Economic Benefits and Impacts on GDP, Department for Transport, Department for Transport, London, www.dft.gov.uk. Holland, M. (2012), Cost-benefit Analysis of Scenarios for Cost-Effective Emission Controls after 2020, Version 1.02, November 2012, Corresponding to IIASA Thematic Strategy on Air Pollution Report #7, EMRC, http://ec.europa.eu/environment/air/pdf/ review/TSAP_CBA_corresponding_to_IIASA7_v1-02[1].pdf. Hubbel, B.J. (2002), Implementing QALYs in the Analysis of Air Pollution Regulations, US Environmental Protection Agency, Washington, DC, www.epa.gov/ttnecas1/ workingpapers/ereqaly.pdf.

Hunt, A. (2011), “Policy Interventions to Address Health Impacts Associated with Air Pollution, Unsafe Water Supply and Sanitation, and Hazardous Chemicals”, OECD Environment Working Papers, No. 35, OECD Publishing, Paris, http://dx.doi.org/ 10.1787/5kg9qx8dsx43-en. Hunt, A. and J. Ferguson (2010), A review of recent policy-relevant findings form the environmental health literature, OECD, Paris, http://search.oecd.org/officialdocuments/ displaydocumentpdf/?doclanguage=en&cote=env/epoc/wpnep(2009)9/final. OECD (2012), Mortality Risk Valuation in Environment, Health and Transport Policies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264130807-en.

Qin, X., L. Li and Y. Lui (2013), “The value of life and its regional difference in China”, China Agricultural Economic Review, Vol. 5, pp. 373-390, http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2298617.

THE COST OF AIR POLLUTION - HEALTH IMPACTS OF ROAD TRANSPORT